The London Metal Exchange zinc market continues to defy bearish expectations, with three-month zinc hitting a fresh four-year peak of $3,858 per metric ton on Tuesday morning, according to a Reuters commentary published on August 25, 2026. The relentless rally presents mounting pressure for short-position holders, particularly as the market exhibits signs of tightening through sharp contractions in LME time-spreads. The cash-to-three-month spread has widened to $131 per ton, echoing conditions last observed in October 2025 when it reached a record $323 per ton.
However, relief may be arriving for shorts as China has begun lifting zinc exports, dispatching metal directly to LME warehouses in Hong Kong. Despite global zinc demand growing modestly at 1.5% year-on-year from January to May, refined metal output expanded faster at 3.5%, creating a global supply surplus of approximately 145,000 tons during the first five months of the year, according to the International Lead and Zinc Study Group (ILZSG). The paradox lies in the geographic distribution of this surplus.
Most production growth originated from China, while Western smelters faced supply disruptions and severe margin pressure from collapsed treatment terms. The supply imbalance is reflected in inventory distribution across markets. Shanghai Futures Exchange stocks have more than doubled to 155,954 tons since the start of January.
LME stocks, including off-warrant storage, stand at 124,677 tons despite recent daily deliveries. Since the start of the previous week, daily warranting activity has intensified as the rising LME premium for cash delivery attracts metal into the system. Volumes have totalled a modest 17,000 tons so far, stabilizing on-warrant inventory around the 95,000-ton level.
Off-warrant stocks have risen from a July low of 15,480 tons to 29,627 tons. Hong Kong has accounted for approximately two-thirds of the deliveries onto LME warrant and holds an additional 5,000 tons in off-warrant storage. The LME approved Hong Kong for good delivery in January 2025, with the first warehouse opening for business in July 2026.
The city is already functioning as a fast-track conduit for physical arbitrage. China historically imported large volumes of refined zinc, reaching 445,000 tons as recently as 2024. However, domestic smelter capacity has expanded to the point where the country approaches self-sufficiency.
Imports fell by a third to 299,000 tons last year, and China turned net exporter in both November and December, delivering metal to LME warehouses in Singapore and Taiwan to profit from the cash squeeze. China again turned net exporter in July to the tune of 4,100 tons as outbound volumes rose to 9,200 tons and imports continued to decline, according to Shanghai Metal Market (SMM). The pace of current arrivals is described as clearly slower than the October 2025 squeeze episode.
Zinc bulls are betting that even Chinese smelters will reduce operating rates as treatment charges compress margins. Investment funds have accumulated over 110,000 tons of long positions, the largest collective bet on higher prices since the LME began publishing positioning reports in 2018. Options market enthusiasm is also evident, with almost 1,500 lots of open interest on December calls at a $4,000-per-ton strike price and another 757 lots at the $4,500-per-ton strike.
The bull narrative centers on restricted mine supply. After three consecutive years of decline, global mine production jumped 4.8% last year, but growth has slowed dramatically to 1.1% from January to May 2026. The competition for mined concentrates has intensified so fiercely that spot treatment charges for Chinese imports are now at a record low of minus $117.50 per ton according to SMM.
Despite this margin pressure, China's smelters continue operating, with growth described as significant in the first five months of 2026. Source: Reuters (August 25, 2026), Andy Home, Senior Metals Columnist. Data cited from International Lead and Zinc Study Group (ILZSG) and Shanghai Metal Market (SMM).
Source: reuters.com